Financial Constraints and Innovation: Why Poor Countries Don't Catch Up

48 Pages Posted: 9 Mar 2010

See all articles by Yuriy Gorodnichenko

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2010

Abstract

This paper examines micro-level channels of how financial development can affect macroeconomic outcomes such as the level of income and export intensity. Specifically, the paper investigates theoretically and empirically how financial constraints affect a firm's innovation and export activities. Theoretical predictions are tested using unique firm survey data which provides direct measures for innovations and firm-specific financial constraints and information on shocks to firms' internal funds that can serve as firm-level instruments for financial constraints. There is unambiguous evidence that financial constraints strongly adversely affect the ability of domestically owned firms to innovate and to export and hence to catch up to the technological frontiers. Furthermore, the negative effect of financial constraints on productivity is amplified as these constraints force export and innovation activities to become substitutes even when these activities are natural complements. Findings reported in the paper can help explain why poor countries don't catch up, despite increasing globalization.

Keywords: BEEPS, export, financial constraint, innovation, productivity, technology frontier

JEL Classification: F1, G3, O16, O3

Suggested Citation

Gorodnichenko, Yuriy and Schnitzer, Monika, Financial Constraints and Innovation: Why Poor Countries Don't Catch Up (February 2010). CEPR Discussion Paper No. DP7721. Available at SSRN: https://ssrn.com/abstract=1567303

Yuriy Gorodnichenko (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Monika Schnitzer

University of Munich - Department of Economics ( email )

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Germany
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+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

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